Not only can an Operating Agreement save your business time, money, and effort, but it can also solve disagreements quickly while giving your LLC a professional appearance. You’ll breathe easy knowing that the minutiae of your business are taken care of.
Give your company the best chance to succeed by planning for its future. The instructions below will help you set up an Operating Agreement for your Colorado LLC.
What is a Colorado LLC Operating Agreement?
A Colorado Operating Agreement determines how a Colorado LLC will make decisions. Whether your company is making a determination about money, responsibilities, or governance, your Operating Agreement should lay out the factors to consider, how to evaluate them, and the procedure for ultimately making the decision.
Your Operating Agreement should drive your LLC to perform in a way that maximizes the benefits to its owners (called “members” in an LLC). Think of your Operating Agreement as a contract. All members of your LLC should agree on it, sign it, and be bound to its terms.
The state of Colorado does not require you to provide an Operating Agreement when you file your Articles of Organization with the Secretary of State. Still, the document is recognized by Colorado law and can be used to solve legal disputes.
You can have a verbal agreement, but it’s wise to get it down in writing and store it in a safe place at your office, where it can be reviewed if needed.
Why do I need an LLC Operating Agreement in Colorado?
An Operating Agreement benefits an LLC in many ways. The U.S. Small Business Administration (SBA) advocates having one for every LLC.
Operating Agreements can be complicated, so it’s a good idea to use a template and/or consult an attorney to help you put one together. The reasons an Operating Agreement is essential to your LLC include:
- It gives you a written document to refer to when disputes arise. This is why having a verbal Operating Agreement can be a bad idea. If members of an LLC disagree on some facet of the business, it’s hard to prove which side a verbal Operating Agreement favors. A written Operating Agreement can be analyzed and reviewed at any time.
- Without it, you’re subject to the default state laws. Without an Operating Agreement, your LLC will be subject to Colorado’s default laws, which might not be the best situation for your members. For example, if your LLC dissolves, and you don’t have a plan in place, you won’t be able to control how business assets are divided among members.
- It helps you get investors for your LLC. An Operating Agreement makes your business seem professional. Before most backers spend money to support your business, they’ll want to see your Operating Agreement. Banks will generally ask to see your Operating Agreement before they’ll even give you a business bank account.
- It reinforces your limited liability benefits. The LLC business structure is designed to limit the liability of its members, but having an Operating Agreement further solidifies your company’s identity as an LLC and helps defend your members from personal liability.
- It gives you the greatest freedom to run your business your way. One of the best things about an LLC is that it’s not required to follow strict regulations like corporations. With an Operating Agreement, your members can decide your way to structure and run your company. This luxury is not available to corporations.
- It harmonizes the members of your LLC. When your members are allowed to agree on the rules of your business, they’ll feel confident that their needs will be met. They’ll also know how to operate efficiently from day one.
What do I include in my Colorado LLC Operating Agreement?
Depending on the needs of your specific business, the contents of your Operating Agreement can vary. It’s important to make your Operating Agreement as thorough as possible because the members of your LLC will be legally bound to it.
There are some areas that most Operating Agreements cover:
- LLC Name
- Management Structure
- Responsibilities and Duties
- Voting Rights and Processes
- Succession Planning
- Buyout and Buy-Sell Rules
- Operating Agreement Modifications
- Single-Member LLC Statute
- Severability Clause
1. LLC Name
Include the full name of your business. The name in your Operating Agreement should match the name on your Colorado Articles of Organization because it’s the name that Colorado identifies your business with by law.
Remember not to use any variation of your business name. This includes abbreviations. If the business name in your Operating Agreement differs in any way from the one on your Articles of Organization, the Operating Agreement may not be legally binding.
It’s required that the name of your LLC contains one of the following designators: “Limited Liability Company,” “Ltd. Liability Company,” “Limited Liability Co.,” “Ltd. Liability Co.,” “Limited,” “L.L.C.,” “LLC,” or “Ltd.” Be sure to include this designator in your Operating Agreement, as well.
Include the entire name of each of your LLC’s owners. You’ll have to decide how the ownership of your business will be split among your members. An LLC can break up its ownership percentage in any way that its members agree upon. Some examples are:
- You may decide to split the company evenly among all the members. Out of five members, each would own 20% of the company.
- You can divide ownership based on a financial contribution to the company. If one partner invested $70,000 in the LLC, and the other partner only invested $30,000, the first would own 70% of the company.
3. Management Structure
In your Colorado Articles of Organization, you’ll have to choose a management structure for your LLC. There are two types of management structures you can choose from:
- A member-managed LLC is run directly by the members. A benefit of making your business a member-managed LLC is that the members have greater control of the business. It’s initially easier to set up a member-managed LLC because you don’t have to hire anyone to run the operation of the company.
- In a manager-managed LLC, the owners hire or appoint a manager to captain the business processes of the LLC. Under this system, members choose one or more of the members to manage the business and/or hire someone from outside the LLC membership to manage the company.
4. Responsibilities and Duties
Outline all the responsibilities of the key people in your LLC. Present a clear picture of the responsibilities of every member and manager in your company. Remember to clarify their rights within the business and what actions they can take for the business.
Include the duties of any members who aren’t directly involved in the day-to-day business. For example, are there certain decisions they must vote on or meetings that they need to participate in?
5. Voting Rights and Processes
You’ve already decided how you want to divide the ownership of your company. Now, you’ll have to divide voting power.
One way to do this is to make members’ voting power proportionate to the percentage of the company that they own. If one member owns 40% of the company, and three other members would own 20% each, the member who owns 40% would have double the voting power of each of the other three members.
However, you don’t have to divide voting power by ownership percentages. You can use any metric you like, so long as all members agree to it.
During the life of your LLC, its members might have to make many decisions, like:
- When and if to add members
- How to handle possible buyouts
- The succession and replacement of members
Not every member has to vote on every issue. Your Operating Agreement should lay out which members will vote on what decisions.
When your LLC starts returning profits, you’ll need a plan to administer those profits among your members. You have a great deal of freedom with how you distribute profits in an LLC.
Consider how your members will get paid. Will their share of the profits be deposited directly into their bank accounts? How often will they see returns? Remember that in an LLC, each member must declare their share of profits on a personal tax return at the end of the year.
It’s also crucial to decide what percentage of the profits each owner will receive. It may make sense to you to give a larger percentage of profits to members with greater ownership in the company, but you can also divide profits evenly among all members or by some other method.
Colorado does not mandate scheduled meetings for an LLC, but it’s wise to lay out the times for your members to meet. Your plan should include:
- Specific dates of the year that meetings will take place
- What each meeting will discuss
- Which members or managers are required to attend which meetings
- The process for adding meetings to the schedule when necessary
- The consequences of missing mandatory meetings
By signing the Operating Agreement, each member of your LLC acknowledges that they’ve seen and agreed to the meeting list and will be less likely to miss important engagements.
8. Succession Planning
Hopefully, your LLC has a long and industrious business life. During your company’s existence, it’s possible that you’ll lose some members to other business opportunities, retirement, death, or a variety of other circumstances.
Your Operating Agreement should explain what will happen to a past member’s assets in the business. Your company’s decision on how assets are transferred can have an impact on how your members plan their personal estates.
For example, if a member dies, will they be allowed to leave their stake in the company to a family member, or will their portion be divided among the other members of the LLC?
9. Buyout and Buy-Sell Rules
When a member does leave your LLC, you’ll want to keep your business running smoothly. There should be a clear procedure for what happens to their ownership in the company and the induction of new or replacement members. You’ll have to decide:
- If current members get a chance to buy out a departing member’s portion of the company before anyone else can purchase it
- Who approves new members and how the decision is made
- How much a new member must invest in the company
Sadly, at some point, you may decide that it’s no longer feasible to keep running your LLC. In that case, the business will have to be dissolved.
Planning for the deconstruction of your company may feel bleak, but it’s necessary to have a plan to handle it.
Your Operating Agreement should include a strategy for when and how to dissolve your LLC. Some things you’ll want to address in your strategy are:
- How is the decision to dissolve your company made?
- Must all the members vote for dissolution, or is a majority enough? (Keep in mind that some members may have greater voting power than others.)
- When the decision to dissolve is made, what needs to be done to wrap up the business’s affairs? At a minimum, you need to consider:
- Filing the Articles of Dissolution with the Colorado Secretary of State
- Filing final tax statements
- Distributing business assets
- Will the LLC be dissolved immediately, or will there be a delay?
11. Operating Agreement Modifications
As your company changes over time, you may find that your Operating Agreement needs to be adjusted. Your LLC may grow or shrink. Members may leave or join. You might decide to reevaluate member roles in your LLC.
Whatever change happens in your business, you’ll need a process for changing your Operating Agreement. You’ll need to decide what actions need to be taken to amend your Operating Agreement, how amendments are decided on, and who regulates those amendments.
12. Single-Member LLCs
You may think that an Operating Agreement isn’t necessary if you’re starting a single-member LLC because, as the only member, you’ll be making 100% of the decisions. Here are a few reasons it’s still very important for a single-member LLC to have one:
- It allows for the growth of your LLC by outlining the process for hiring managers and adding new members.
- It lays out the roles and responsibilities for yourself and anyone who joins your LLC in the future.
- It clearly communicates to banks that you have the sole right to act on behalf of your LLC when you apply for a line of credit.
- It displays the process for succession if you leave your company for any reason.
- Banks and potential investors and business partners will likely want to see your Operating Agreement.
13. Severability Provision
A severability clause explains that even if some part of an Operating Agreement is void, the rest of the Operating Agreement remains valid. This clause is found in many contracts. By including a severability clause in your Operating Agreement, you’ll protect yourself from making a tiny mistake that renders the entire document invalid.
Partner With ZenBusiness for Professional Assistance
Because drafting an Operating Agreement can be complicated. It can be a good idea to enlist some professional help. A business lawyer can help you draft the best Operating Agreement for your particular business.
ZenBusiness makes drafting your Operating Agreement easy. Use our customizable template to create an Operating Agreement for your Colorado LLC. Even with a template, though, it’s still a good idea to have a lawyer look at the final product.
Updating and Revising Your Colorado LLC Operating Agreement
You should take time regularly to make sure your Operating Agreement is up to date. LLCs are flexible enterprises. You may find that the way you do business evolves. Some reasons you’d want to update or amend your Colorado Operating Agreement include:
- You’re adding or losing members in your LLC.
- You’re hiring or firing managers.
- You’re making a change in handling finances (e.g., profit distributions, capital contributions, etc.).
- You’re changing the business model of your LLC. (e.g., member-managed to manager-managed).
- You’re reevaluating the roles or responsibilities within your company.
By analyzing your Operating Agreement every year, you can make sure that your Colorado LLC is legally compliant and runs as efficiently as possible.
Read through your Operating Agreement with the other members of your LLC. If you see anything that could be changed, have your members vote on whether to change it. If you decide to make a change, write it down immediately, and then go back and alter your Operating Agreement.
Some changes to your LLC will have to be filed with the Colorado Secretary of State. There is a $25 fee for filing a Certificate of Amendment for your LLC.
Colorado Operating Agreement FAQs
- Is an LLC Operating Agreement required in Colorado?
An Operating Agreement is not required in Colorado, but it’s a very good idea to have one. An Operating Agreement legally binds members of an LLC to its terms and takes legal precedence over a state’s default laws regarding LLCs.
- Where do I get an LLC Operating Agreement in Colorado?
ZenBusiness offers a customizable template to help you set up your Operating Agreement. You’ll still want to run it by a lawyer when you finish, though.
- Does a single-member LLC need an Operating Agreement in Colorado?
It’s important for a single-member LLC to have an Operating Agreement, much like it is for a multi-member LLC. The document lays out plans for the growth of the LLC and serves as a legal notification that the sole member has complete freedom to act on behalf of the LLC.
- Do I file an LLC Operating Agreement with Colorado?
No, Colorado law does not require you to file an Operating Agreement with the Secretary of State. Rather, the Operating Agreement should be stored somewhere at your company, so you can access it when it’s needed.
- Can I write my own LLC Operating Agreement in Colorado?
Legally, you can draft your own Operating Agreement. Templates, like the one offered by ZenBusiness, can make the process easier, but you should always have a lawyer check your document.
- Do I need a lawyer for an LLC Operating Agreement in Colorado?
While you don’t legally need a lawyer, one familiar with your state’s business laws can really help you make the most of your Operating Agreement. A professional may be able to add parts to your Operating Agreement that can really set your LLC up for success.